The stock of drug major Dr Reddy’s Labs (DRL) crashed 22% in the last three days, swiftly eroding the gains made over the last five months.Kiran Kabtta Somvanshi | ET Bureau | November 12, 2015, 09:49 IST

The stock of drug major Dr Reddy's Labs (DRL) crashed 22% in the last three days, swiftly eroding the gains made over the last five months.The US Food and Drug Administration (USFDA) is fast becoming a dreaded word on the Street for pharma stocks. A glare from the US authority not only pulls down a company’s stock but also the positive triggers for the company. To make matters worse, the not so fair disclosure practices of drug companies add to the nasty surprise for investors. As pharma companies underplay the implications of USFDA inspections and updates, the actual FDA action — when it happens in the form of observations, action indicated reports and warning letters —rattles small shareholders.

The stock of drug major Dr Reddy’s Labs (DRL) crashed 22% in the last three days, swiftly eroding the gains made over the last five months. The company received a warning letter from the USFDA for three of its manufacturing facilities at Srikakulam, Miryalaguda and Duwada. While the company had informed about the USFDA’s observations on the Srikakulam facility last November, investors were not aware of the action against the other two facilities which were inspected in January and February.

Though pharma companies are not under any legal obligation to disclose routine inspection outcomes about their plants, it would have been only fair and proactive on DRL’s part to alert investors before it received the warning letter.Similarly, Sun Pharma in its earnings call after the results made a passing mention about its Halol facility receiving the Official Action Indicated (OAI) report from the FDA.

The stock has declined 9% following the results as the Street realised the adverse nature of an OAI. An OAI inspection classification occurs when significant objectionable conditions or practices are found and regulatory action is warranted to address the establishment’s lack of compliance with statutes or regulations.

DRL had received the warning letter for Srikakulam facility soon after receiving an OAI from USFDA. Had Sun been proactive in disclosing the receipt of OAI for its Halol facility, the steep decline in the stock the following day could have been avoided.

Pharma companies are typically proactive in disclosing positive news like receiving a drug approval or completing an acquisition. They need to extend this agility in disclosing negative news promptly. By doing so, companies can avoid giving nasty surprises to the Street and also improve their credibility among stakeholders.

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